Dell’s Low Price Formula

From PCs to All Electronics-

Dell does not manufacture state-of-the-art products. Instead, they enter markets when these innovative products have become more widely utilized, and lower their prices through price competition. This is called the “Dell Effect.”

Prices of laptops and small and medium enterprise servers have fallen dramatically due to the “Dell Effect.”

Samsung Electronics and LG Electronics announced that they will “compete with high priced premium products” in the laptop market, but they have lowered their prices due to Dell’s aggressive low price attack. According to a current research, over 70 percent of the laptops sold in Korea cost under one million won.

The next market for confrontation is the digital TV market.

Dell’s 30-inch LCD TV is $1,399 (1.4 million won) in the United States. Its price is approximately 60 percent of Samsung and LG Electronics’ 30-inch models (2.3 million won). This product will soon be sold in Korea, thus lowering the price even more.

Dell’s Research and Development (R&D) Goals Are Different-

Kim Jin-gun, president of Dell Korea, said, “Most IT companies boast of highly developed technologies of the future, but in reality, it is difficult for even one out of 10 of those to actually become a product. Dell invests not in new technologies but in products that can be bought at a low price right now.”

Therefore, Dell invests little in R&D.

Dell’s competitor HP invested 5 percent ($3.5 billion) of their total sales in 2004 in R&D; Dell only invested about one percent ($460 million) of their revenues in R&D.

Dell’s purpose for R&D investment is also different. Most IT companies invest to develop new technology and products, but Dell develops ways to cut costs.

As a result, HP and IBM spend 19 percent and 30 percent of their respective revenues in selling and administrative costs, but Dell does not spend over 10 percent.

Dell is known to cut costs from the beginning stages of buying parts.

Generally, prices of parts in IT products drop, on average, 10 percent every three months. Dell decides on the quantity of parts every three months and decides whether to buy them when they are in stock, thus lowering costs.

Dell’s Production Know-How-

Dell’s PC manufacturing process is as follows: When a consumer selects a PC from Dell’s website and pays for it, a factory in Malaysia orders parts for that PC from the surrounding parts manufacturers.

These parts arrive at the factory within the hour. One worker puts the PC together alone. In order to save time, the PC is produced in “module” form, where the parts are assembled without bolts.

Even in the instances where bolts are needed, in order to save time, the bolts are standardized, and each screw is turned only three and a half times.

Due to this simplified process, ordering, manufacturing, and packaging takes three hours on average. They have no factories for parts or inventory, so they are not burdened by overhead.

Recently, this assemble-to-order process has been expanded to printers, servers, and digital TVs, threatening competitors.

Kim stated, “Dell’s strength is in removing the bubble from costs in every aspect, from ordering to manufacturing to distributing.”

Sang-Hoon Kim Do-Young Kim sanhkim@donga.com nirvana1@donga.com